The federal estate tax can have a major impact on your family’s future if you have accumulated a significant store wealth. It carries a 40 percent top rate, and it is potentially applicable on the portion of your estate that exceeds the exclusion.
In 2026, a key provision in the Tax Cuts and Jobs Act will expire, and the exclusion will go back to the 2017 level, which is $5.49 million.
There is no taxation on transfers between spouses because there is an unlimited marital deduction. The estate tax exclusion is portable, so a surviving spouse can use their deceased spouse’s exclusion.
Federal Gift Tax
Lifetime gift giving would make a lot of sense as a way to avoid the estate tax, but the loophole is closed because there is a gift tax in place. It has been a fact of life continuously since 1932, and the estate tax and the gift tax are unified under the tax code.
The unification makes the exclusion a unified exclusion that applies to large lifetime gifts that you give while you are living and your estate. However, the “large” qualifier is very relevant.
In addition to the unified lifetime gift and estate tax exclusion, there is an additional annual exclusion. You can give up to $17,000 to an unlimited number of recipients each year free of federal transfer taxes.
There is no limit to the total amount you can give as long as do not give more than $17,000 to any one person in a calendar year. If you are married, you and your spouse can combine your respective exclusions to give $34,000 tax-free to any number of people each year.
This can be part of an estate tax efficiency strategy if your estate is in taxable territory. If you have married children, you could give $34,000 annually to each husband and each wife, and this would add up considerably over time.
There are two additional exclusions that you should be aware of if taxation is going to be a source of concern. If you want to pay school tuition for students, the gift tax would not be levied, as long as you pay the institution directly.
This is a tuition-only exclusion that does not extend to living expenses, books, and fees. However, you can use your annual per person exclusion to provide a student with additional support.
Another exclusion gives you the ability to pay medical bills for others without being taxed. In addition to services rendered, the exclusion extends to the payment of health insurance premiums.
State-Level Estate Tax
While we are on the subject, we should address state-level estate taxes. There are a dozen states in the union that impose their own separate estate taxes. South Carolina is not one of them, but if you own property in a state with an estate tax, it would be factor if its value exceeds the exclusion in that state.
Need Help Now?
If you are ready to work with a Hilton Head, SC estate planning attorney to put a plan in place, we are here to help. Give us a call at 843-815-8580, and we will set up a consultation appointment that fits into your schedule.
